Breakingviews - China Tower debut reveals costs of tech leadership

People walk past a sign of China Tower Corp at the PT Expo China in Beijing, China September 29, 2017. Picture taken September 29, 2017. REUTERS/Stringer

HONG KONG (Reuters Breakingviews) - China Tower’s flotation shows the price of telecoms dominance. Shares of the infrastructure company opened flat in Hong Kong on Wednesday. The newly listed entity commands a low valuation relative to its Western peers. It’s a keen reminder of the cost of leading the global industry.

The company raised $6.9 billion from the initial public offering, giving it a roughly $28 billion market value. Stock was sold at a multiple of almost eight times its EBITDA in 2017. That’s a steep discount to U.S. tower companies, American Tower and Crown Castle, which trade at nearer 22 times and 23 times trailing EBITDA, according to Eikon.

Cheap valuations affect the rest of the industry too. The three state-backed carriers – China Mobile, China Unicom and China Telecom – trade on multiples below 3.5 times trailing EBITDA. By contrast, Verizon and T-Mobile are valued at around 7.1 and 7.8 times respectively, while Vodafone is less than six times.

The steep discounts are in part because Beijing wants the carriers to build out a world-beating 5G network, probably starting in earnest around 2019. EY expects capital expenditure for the technology to reach 1.5 trillion yuan ($220 billion) between 2019 and 2025. The commercial rationale is hazy, and it’s uncertain if officials will allow companies to later charge consumers more to recoup costs.

The concern for China Tower centres on its future lease negotiations; current agreements expire in late 2022. The state-owned company may be strong-armed into cutting its exhausted customers – who also double as its part owners – a break on fees.

That’s what happened earlier this year when the most recent round of negotiations reduced costs for the carriers, shaving around 2.9 billion yuan ($425 million) off net income this year – more than forecast earnings of 2.2 billion yuan, Bernstein estimates.

It’s a reminder of the steep expense of China’s much-vaunted ambition to lead in telecom technology. That prospect – and the security and commercial implications it might entail – has sent hearts racing in Washington, New Delhi and elsewhere. China Tower investors may also feel their pulses quicken as the scope of that endeavour becomes clear, albeit for very different reasons.

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